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Friday, August 31, 2012

Spain announced its plans for cleaning up its banking sector earlier. With the full legislation only just released, we are still looking through it and will bring you the pertinent points in due course. But there was also another interesting development with regards to the ailing lender BFA-Bankia.

The Spanish government announced this afternoon that BFA-Bankia will receive an "immediate capital injection" from Spain's bank restructuring fund (FROB). Nonetheless, Spain has decided not to request the early disbursement of part of its €100bn bank bailout package. This is despite the fact that €30bn had been set aside for emergencies, as the Eurogroup noted in a statement issued earlier this afternoon. The funds will therefore be paid out in advance by the FROB and will be eventually incorporated into the Spanish bank bailout when it is fully dispersed.

This raises a couple of interesting questions. Firstly, why is Spain so keen to avoid tapping the €30bn kept in reserve? The money is there for just such an occasion, and in fact it was fairly obvious that this exact situation would arise. What's more, the money will be folded into the bailout anyway. Therefore, we can only imagine that the Spanish government is keen to avoid some kind of negative stigma – although this seems slightly strange since the bailout is already confirmed. It is worth keeping in mind the constraints of the EFSF vs. ESM funding (which we covered here), so it is possible that Spain and the eurozone have decided they want to wait until the ESM is fully operational before tapping the funds.

Reading the press release, it is also clear that this is a restructuring of BFA-Bankia, meaning it is still viewed as a viable bank. This seems almost outrageous for a few reasons:

• Bad loans held by Bankia jumped by 44% (to 11%) in the past six months alone
• The group just posted a loss of €4.45bn, compared to a slight profit a year ago
• In the past six months the banking group has lost a staggering €37.6bn in client funds, a massive 28% fall.

It’s been clear to most for some time that Bankia is no longer viable. The latest government plans for dealing with the banking sector provide for an “orderly resolution” of unviable banks and a template for splitting up its assets and winding down the institution. It is not entirely clear why this is not being applied here, although protecting retail investors could be part of it. In the end, though, investing further public funds into a failing institution will do everyone more harm than good.

Thursday, August 30, 2012

In today's City AM we look at what Catalonia's decision to request a bailout from the Spanish government means for Spain, its Prime Minister Mariano Rajoy, and the eurozone. Here it is:

Catalonia's decision to seek a bailout from the Spanish government was just a matter of time. With over €5.7bn (£4.5bn) of debt maturing before the end of the year, Spain’s wealthiest – but also most heavily indebted – region had very little chance of paying its bills without some form of external assistance. The request is going to be a huge test of Prime Minister Mariano Rajoy’s mettle.

Despite asking for a loan of over €5bn – that is, almost one third of the money the Spanish government has earmarked to help all 17 of the Comunidades Autónomas – the Catalan government has so far shown no signs of graciousness towards the central government.

In fact, a Catalan government spokesman provocatively told the press that Catalonia will not even say “thank you” to the Spanish government for its help. The logic being that the money the region is going to borrow was Catalan taxpayers’ money in the first place – previously confiscated in order to pay for transfers to the rest of Spain. Most importantly, Catalonia has said it will reject any “political conditions” and has no intention to make further cuts to meet the deficit target imposed by the central government for this year.

The upcoming negotiations over the details of the bailout will therefore turn into a key credibility test for Rajoy, on two fronts. Domestically, his government simply cannot afford to display any weakness throughout the talks with the Catalan leaders. If Rajoy rolls over for Catalonia, other regions will feel encouraged to claim their share of cash from the central government, with little or no strings attached.

This will raise questions over whether the €18bn in the bailout fund set up by the Spanish government to help cash-strapped regions is going to be enough. At this stage, half of the money in the pot has already been committed, with only three of the 17 regions deciding to tap the fund, so far.

At the European level, the Spanish government desperately needs to prove that it is capable of reining in the regions’ spending. As European Council president Herman Van Rompuy recalled during his visit to Madrid earlier this week, internal problems resulting from the way the Spanish state is organised are not Brussels’s, but Madrid’s. In other words, domestic inter-regional Spanish politics will not be considered a valid justification for Spain missing its EU-mandated deficit targets once again.

With the markets broadly expecting Spain to ask the Eurozone’s temporary bailout fund, the European Financial Stability Facility, to start buying Spanish bonds in a bid to reduce its unsustainable borrowing costs, the Spanish government needs to make sure that it comes out of the negotiations with Catalonia in a position of strength.

If, on the other hand, Rajoy is shown to be unable to exert control in his own backyard, his negotiating position in Brussels will surely be weakened – and his Eurozone counterparts will be increasingly reluctant to take his promises of reform and fiscal consolidation seriously.

ECB President Mario Draghi had a long and interesting op-ed in Die Zeit yesterday morning, titled ‘The future of the euro: stability through change’. Interestingly, the piece seems specifically targeted at gaining support in Germany, not unlike Greek PM Antonis Samaras' charm offensive last week. For example:

“Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others.”

“Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate.”

The main thrust of the piece is that Draghi dismisses the option of a United States of Europe as well as the prospect of returning to the previous setup. Instead, Draghi focuses on a 'third way', a slightly vague proposition built upon combined economic and fiscal policies and greater financial oversight – again a picture which is likely to appeal to the traditional (ordo-liberal) German economic approach. Draghi sees the political and economic developments moving in tandem over time rather than through giant leaps and grand agreements.

There are a couple of key issues that Draghi fails to address:

There is no real explanation of how his proposed 'third way' would address the internal eurozone imbalances he correctly identifies as a cause of the crisis, other than some loose talk of competitiveness, (i.e. there is no mention of fully-fledged fiscal union that goes down so badly in Germany).

How will the eurozone find the time to make the piecemeal changes he suggests? Greater fiscal and financial oversight takes time to set up and organise. He also fails to mention the political/democratic implications of pooling greater economic powers at the eurozone level. Again no mention of potential ECB spending or bailouts to buy time for these changes.

Ignoring these issues makes the prospect of a eurozone solution without a political union sound easy, but in reality ensuring that conditions are enforced and that money is well spent may well require such a set up. This also avoids the thorny questions of democratic accountability which follow on from political union.

Ultimately, Draghi's unwillingness to put a price tag on any of his suggestions or explain how they can be delivered in a democratic manner makes them hard to believe. The German public deserve better 'solutions' than this.

Wednesday, August 29, 2012

A key question for the future institutional arrangement of the Eurozone is whether further integration will happen at the level of all 27 member states, within the framework of the EU treaties, or whether the Eurozone will simply press ahead with an ‘inter-governmental’ deal, circumventing the acquis communautaire and non-eurozone members.

This is critical for the UK as under the latter option, Britain will have little to no leverage over future Eurozone integration, whereas under the former it’ll have a solid veto, which it can use to extract all kinds of concessions in pursuit of its national interest.
Following Cameron’s veto to an EU-27 treaty change last December – which resulted in the intergovernmental fiscal treaty - a host of eurosceptics and status-quo defenders alike now tend to argue that the precedence has been set; Eurozone members can do whatever they want inter-governmentally, they say, and use the EU institutions at that. Britain has been reduced to the role of a spectator. The plot has been lost and the goose has been cooked.

From there, some eurosceptics reach the conclusion that Britain should withdraw altogether, whereas the status quo defenders say Britain should hop on the train towards more integration (at which point they cease to be status quo defenders and turn into brave souls advocating that Britain signs up to a euro superstate).

So has the goose been cooked?

Well, this week’s Spiegel magazine splashed with the news that the German governmet is pushing for a new EU treaty that will consolidate and expand Eurozone budget oversight powers – referred to in Germany under the euphemism of ‘political union’ - under a firm legal framework. Chancellor Angela Merkel is reportedly pushing for a convention – comprising representatives from national governments and parliaments, the European Parliament and the European Commission – to be formed by the end of the year, with a first meeting to be agreed at an EU summit in December. If the article is accurate, a ‘convention’ would be about a ‘full’ Treaty change, not the limited one agreed in December 2010.

One of the main changes sought is the provision for the ECJ to rule if national budgets comply with the EU's fiscal rules, with the option of credible sanctions for non-compliance, something Merkel failed to secure in the inter-governmental fiscal treaty last year – courtesy of French nervousness over loss of souveraineté.

It’s difficult to gauge how credible the story is – speaking on ARD Merkel said that “I am not calling for a convention… that’s not the point”. Though politicians’ denials count for zero these days, it’s probably right that December is not realistic as a start date for a new EU treaty. Apart from everything else that needs to be sorted first, EU leaders still remember how long it took to push through the European constitution/Lisbon treaty – which Europe’s citizens didn’t like that much (as for being a ‘crisis’ this was of course a mere prelude to what has come to pass since). And unlike the Lisbon treaty, codified central fiscal controls would be about decisions over taxation and spending – the bread and butter of national politics. Also, non-euro member states – such as Poland - oppose a new treaty at this time on the basis that it would widen the euro/non-euro divide with a negative impact on the single market.

But while it is clear that there is no great enthusiasm for it, it is difficult to escape the conclusion that at some point in the near future, the eurozone will need a new set of rules if it is to stay together in the longer term. As good as the EU is at fudging it, ploughing on incrementally with economic and fiscal integration is politically unsustainable. So the question for Britain’s leverage in Europe really becomes, how bad does the Germans want to anchor Ordnungspolitik in EU law. Well, as we argued in the Telegraph back in February:

“The Germans in particular – ever conscious of their Constitutional Court– know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.”

This is key. For a range of reasons (see here, here and here), the Germans don’t have that much confidence in Eurozone inter-governmental arrangements, as it leaves them more at the mercy of the ‘Club Med’ and creates a grey zone between EU law and the German ‘basic law’ which is just too awkward to bear for many Germans.
Sooner or later, there will be an attempt at EU treaty changes.

Tuesday, August 28, 2012

As the next ECB meeting approaches on 6 September, the debate about potential ECB intervention is heating up. This past weekend was particularly interesting with two key German players weighing in with their views – even more importantly these views turned out to be increasingly divergent.

German ECB Executive board member Jörg Asmussen (on the right of the picture) revealed more details on potential ECB intervention yesterday, saying, “Under the framework of the new programme, the ECB will only buy bonds with short maturities,” adding the caveat that, “The whole discussion will be led by the requirement that any concerns about treaty-violating state financing are dispelled. We will only act within our mandate.” Asmussen also stressed that he would like to see any ECB intervention initiated in tandem with use of the eurozone bailout funds, saying, “The error with Italy…must not be repeated,” seemingly referring to the Italian government's failure to take full advantage of the time bought by the ECB over the past year.

Meanwhile, Der Spiegel has a lengthy and interesting interview with Bundesbank President Jens Weidmann, the other German on the ECB’s Governing Council, in which he renews his opposition to any greater intervention by the ECB, warning, “We shouldn't underestimate the danger that central bank financing can become addictive like a drug,” adding that proposals for ECB bond purchases were "too close to state financing via the money press”.

Together, these two men represent Germany at the ECB, so for them to strike such different tones is rather surprising (although it has been hinted at previously). Asmussen remains much more positive and supportive of Draghi’s position, while Weidmann takes a more traditional German stance against any prospect of monetary financing of government debt (a position which has garnered significant support with the German public).

The real question though, is who has the support of German Chancellor Angela Merkel? That remains unclear, particularly with both having previously been close advisors to Merkel. The Spiegel article suggests that Merkel has become somewhat impatient with Weidmann's strict ideological stance, especially as it begins to hamper a potential path to crisis resolution (at least in her eyes). However, last week Handelsblatt suggested Merkel had in fact decided to side with Weidmann over Asmussen.

If this divide continues, the issue will likely come to a head leading to some tough decisions for all involved – in fact any decision to sanction greater intervention would make Weidmann’s position in particular quite difficult. Choosing who to support will be a difficult political decision for Merkel which goes beyond just figuring out how best to solve the crisis – she must weigh the public response at home and abroad, the market impact, her relationship with ECB President Mario Draghi and her support within her own party and the broader German coalition. Asmussen also has to tread a careful line as, despite being independent, he risks seeing his influence and support within Germany decline rapidly. Weidmann, whom many have suggested has already become isolated, risks a similar erosion of support, although abroad and within the ECB rather than Germany. If greater intervention comes to pass, as seems increasingly likely, the spectre of his predecessors Weber and Stark, both of whom resigned from the ECB Council in protest, will undoubtedly loom large.

As we have noted countless times before the role of the ECB cuts right to the heart of the German approach to the eurozone. Expect plenty more developments on this front in the near future.

Friday, August 24, 2012

It may sound incredibly obvious, but the eurozone crisis is not only about Greece. Yes, Athens may be facing its "last chance" (Juncker dixit) to save its euro membership. And yes, the diplomatic offensive launched by Greek Prime Minister Antonis Samaras (see picture) to obtain a two-year extension to the EU-IMF adjustment programme clearly deserves attention.

However, while everyone is talking about Greece, quite important (and not necessarily good) news is coming out of other eurozone countries - of which, as usual, we also offer a comprehensive overview in our daily press summary.

In particular:

According to sources quoted by Reuters, the Spanish
government is in talks with its eurozone partners about the eurozone’s
temporary bailout fund, the EFSF, buying Spanish bonds – but has made no
final decision over whether to request the assistance. Unsurprisingly, the European Commission said that there are no negotiations under way, and a bailout request from Spain is not expected "any time soon". Right...

According to a high-ranking official at the Portuguese Finance Ministry quoted by Jornal de Negócios, Portugal (the 'forgotten man' of the euro crisis) will not be able to meet the EU-mandated deficit target of 4.5% of GDP for this year unless new austerity measures are adopted. The main reason seems to be the sharp fall in tax revenue: -3.6% during the first seven months of the year, as opposed to the 2.6% increase the Portuguese government was betting on for 2012. The alternative, the Portuguese press suggests, would be asking the EU-IMF-ECB Troika to relax the target. Boa sorte with that one, especially since in September we will hit the point where Portugal is within one year of being expected to return to the markets. Remember how the IMF's requirement for a country to be funded for twelve months played out in Greece...

A Cypriot government spokesman told reporters yesterday that the island's public deficit at the end of the year will be around 4.5% of GDP – significantly higher than the 3.5% of GDP initially forecast. Clearly not good news, as this will almost certainly increase the EU-IMF bailout Cyprus is currently negotiating. Another headache for the Troika, which is due to visit the island again shortly (although no clear date has been specified yet).

New figures published by the Irish Central Bank show that €30.5 billion or 27.2% of the €112 billion outstanding in owner-occupier mortgages at banks in Ireland was in arrears or had been restructured at the end of June, up from €29.5 billion (26%) in March. Furthermore, German Finance Minister Wolfgang Schäuble told the Irish Times that he will oppose any debt-relief plan for Ireland that “generates new uncertainty on the financial markets and lose trust, which Ireland is just at the point of winning back.”

Add the German Constitutional Court ruling on the ESM treaty along with the Dutch general elections (with the EU-critic Socialist Party led by Emile Roemer ahead in the polls) into the mix and it really looks like there will be little room for boredom in September.

Thursday, August 23, 2012

A bit of mystery ahead of this evening's meeting between German Chancellor Angela Merkel and French President François Hollande. A French diplomatic source told AFP yesterday that, before their working dinner, the two leaders will make a short statement to the press, but will take no questions from journalists.

However, the source went on to suggest that Hollande was quite keen to hold a proper press conference, since he "has not talked about Greece for a long time and wants to communicate." But apparently his request fell on (Merkel's) deaf ears.

Needless to say, the diligent Steffen Seibert - the German Chancellor's spokesman - moved swiftly to clarify that the decision not to open the floor for questions had been made "by mutual agreement". Hollande's office also stressed that the chosen format mirrors the one used during Merkel's previous visit to Paris at the end of June.

Mystery solved? Maybe, but the fact remains that Hollande has reportedly planned a separate press conference at the French Embassy in Berlin after his dinner with Merkel.

Will a common position on Greece be easier to agree on than the format of a press conference?

On 12 September, elections will take place in the Netherlands. Due to the country's traditional role as an ally to Germany in monetary affairs, they will be watched with close attention (and by coincidence the German Constitutional Court is due to rule on the ESM Treaty the same day).

What do the opinion polls say?

The latest opinion poll shows that caretaker Prime Minister Mark Rutte’s right-of-centre-liberal VVD party and the EU-critical left-wing Socialist Party would get the most votes, with
each obtaining 34 seats in Parliament. Sniffing around third place are four parties: the social democratic PvdA (21), the Christian democratic CDA (16), Geert Wilders' PVV (14) and the left-liberal D66 (13). The Christian Union, which sits with the Tories in the ECR-group in the European Parliament, would get around 7 seats, and GreenLeft 4.

What are the coalition options?

There are broadly two possibilities:

- Firstly, a centrist coalition might emerge from the VVD, PvdA and CDA. However, the polls suggest this currently falls a few seats short of the necessary majority. This coalition could be expanded to include D66, which would make for a eurofederalist formation, but this might not be convenient in the face of an EU-critical, although disparate, opposition composed of the Socialist Party and Wilders' PVV. Alternatively, the seats of the moderately EU-critical Christian Union might be sufficient but then the government would only have a narrow majority, if the current poll results materialise.

- A second option, the preferred solution of the Dutch social democrats (PvdA), would be a government with the Socialist Party, CDA, and GreenLeft. This would only narrowly obtain a majority and probably also need the support of D66. While the CDA would need to be convinced, it is questionable whether a government led by what many consider a far-left party is a viable political option in the Netherlands. The Socialist Party started off as a Maoist formation (a bit like the current European Commission President) but has moderated its tone and could now be described as left wing populist. Its current leader, Emile Roemer, who vehemently opposes the fiscal pact, has repeatedly warned that he won't pay any EU fines for breaching budget deficit limits, saying he would "put his body on the line".

Other options are theoretically possible, but unlikely: the divisions between the VVD and Socialists look too deep, while it's unlikely that the VVD would choose a new deal with Geert Wilders, after the previous Dutch government fell due to Wilders' opposition to austerity. The most likely outcome remains some kind of centrist government, possibly after several months of negotiation (last time around, it took four months to form a government).

What are the campaign themes?

Unavoidably, Europe is high on the list. The last government fell over EU-imposed austerity and it is no surprise that Socialist leader Roemer has raised it as an issue. Roemer has also warned that any transfers of power to the EU would need to be agreed by referendum (in a similar vein the UK's 'referendum lock'). Things have been moving in a more EU-critical direction for a few years now. Only 58% of Dutch voters are currently in favour of EU membership, a stunning drop from 76% in May 2010. Two thirds of Dutch voters want to see less of their cash going to the EU budget. Last, but certainly not least, there is general discontent about the eurozone bailouts, with at least half of Dutch citizens saying in May that they wanted to see a stop on money being sent to Greece and a majority opposing the eurozone's permanent bailout fund, the ESM.

Another important issue is pensions,
following reports that cuts
very likely will need to be made. Dutch pension rules are also under threat from upcoming EU initiatives such as Solvency II, which are being fiercely opposed by the Dutch government.

Economic policy is, as always, high on the agenda. Dutch PM Mark Rutte entered the campaign this week, promising tax cuts in order to reward those who work, in a bid to present his party as the alternative to voters who are scared of the SP and draw left vs. right battle lines.

What's the political context?
Much of what's happening in the Netherlands today is still seen in the light of the murder of Pim Fortuyn in 2002. The Pim Fortuyn List, certainly started to break down the consensus in Dutch politics on issues such as immigration and the EU. Of course, a lot of has happened since: a range of unstable coalition governments, the no-vote in the referendum on the European Constitution in 2005, the rise and influence of Geert Wilders.

The sluggish Dutch economy also appears to have become somewhat decoupled from the German economy. There is particular concern about the housing market.

What will be the consequences for the EU and the euro?

Dutch daily De Volkskrantran an article earlier this month noting that the current Dutch government has increasingly been playing EU hard-ball behind the scenes, under the headline "European patience with the annoying Dutch is almost up". An EU diplomat was quoted as saying, "the problem is not that the Netherlands is obstructing, the problem is that the Netherlands is almost always obstructing".

Given that around a third or more of the Dutch electorate now seem prepared to vote for more or less EU-critical parties, that isn't going to change anytime soon. Still, it will make a big difference whether the Socialist Party will make it into government or not, and perhaps more symbolically, whether it will become the biggest party in the country. Both remain uncertain.

However, it is clear that the consequences could be far reaching, especially for Chancellor Merkel if one of her most loyal allies starts to make things even more politically fraught at the level of the eurozone.

Tuesday, August 21, 2012

It has been reported that David Cameron’s attention has fixed on the
old idea of building a Severn barrage to provide renewable energy. Much of the
reporting puts this in the context of the politics of infrastructure spending;
however there may be another reason that we have previously highlighted for his renewed interest. That being that he has little choice if his own desire to comply with the UK’s EU target of producing 15% of
its energy form renewable sources by 2020 is to be met.﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿
﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿﻿Background
The EU’s renewable target,
(agreed by Tony Blair in 2007) requires the UK to shift from just 1.3% of total
energy from renewables in 2005, the baseline year under the EU Directive, to
15% by 2020 – the largest proposed increase of any member state (see graph
below). The Government predicts that this will come at a net cost of £66bn to
the UK over 20 years. This is a huge cost given that the UK already faces a
major energy generation challenge – a quarter of existing power
plants in the UK are due to close by 2020 – and that Britain should be in the enviable position of being one of the
EU’s top energy producers, largely due to North Sea oil and gas, which makes it
far less reliant on traditional energy imports than other member states.

The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to
source energy for transport or heating from renewables. The UK currently has
one of the lowest proportions of electricity generated by renewables in the EU,
illustrating the scale of the challenge.

So why do EU rules make the barrage almost a certainty?Article
5(2) of the original proposed renewables directive (requested by Britain) made it clear that the
UK would have to build the controversial Severn Barrage in order to meet its EU
renewables target.

The proposed article
stated that:

“Member States may apply to the Commission for account to be taken, for the
purposes of paragraph 1, of the construction of renewable energy plants with
very long lead-times on their territory under the following conditions:

(a)
construction of the renewable energy plant must have started by 2016;

(b) the renewable energy plant must have a production capacity equal to or in
excess of 5000 MW;(c) it must not be possible for the plant to become operational by 2020;(d) it must be possible for the plant to become operational by 2022."

Given the extremely specific description (something five times more powerful
than a large nuclear power plant which will be built between 2020 and 2022),
this can only realistically have refered to the barrage.

Expensive stuff given this was possibly all based on a "mistake"
In 2008, the UK Government's former chief scientific adviser, Sir David King,
suggested that Prime Minister Tony Blair and the other EU leaders did not
understand what they were committing themselves to when agreeing the target:

"I
think there was some degree of confusion at the heads of states meeting dealing
with this. If they had said 20% renewables on the electricity grids across the
European Union by 2020, we would have had a realistic target but by saying 20%
of all energy, I actually wonder whether that wasn't a mistake."

Tony Blair thought he had signed up to increase this:
15% of electricity from renewables

But he actually committed the UK to this: 15% renewable share of all energy by 2020

Leaving this: A UK renewables gap even the barrage might not fill

Source: Open Europe: The EU
Climate Action and Renewable Energy Package: Are we about to be locked into the
wrong policy? (2008)

But the
whole idea was rather muddled in any event

Focusing
on renewable energy from a climate change point of view sounds good but the 2020 rush to renewables is illogical as it ignores and actually diverts resources away from
the easier and cheaper CO2 reduction wins to be gained from all other technologies (clean gas, clean coal, CCS, reducing consumption or even renewables that are at an earlier stage of technological development).

Several aspects of the EU’s climate change policy (forgetting the UK’s
own self-imposed targets) are also self-defeating, including the competing and complex nature of the individual policies: the
Emissions Trading System (ETS), which is essentially meant to be a market-based carbon
pricing framework, and the aforementioned renewables target, which is essentially designed to change the
energy mix of member states, often through subsidy.

In practice, forcing electricity generators
towards prescribed renewable technologies, such as wind, through the 2020 target and government subsidy lowers the carbon price under the ETS because firms are being subsidised
to meet the cap. This undermines the ETS’ carbon pricing function, which is meant to be the driver of investment in the cheapest low carbon alternatives.

A similar conflict can be seen between the EU’s initial push for a biofuels
target, and the subsequent move to sustainability criteria, and additional
production costs, due to the previously unforeseen impact certain biofuel production had on food prices and land use. All told, this policy mix is unlikely to be the best value for money option in reducing CO2 emissions.

With European politicians still nursing their holiday sunburns, speculation has already returned to the Eurozone crisis. Unsurprisingly, the focus is again on European Central Bank (ECB) intervention, not least because its president Mario Draghi’s commitment to “do whatever it takes” to save the euro may now require him to follow through.

The main plan being mooted is for the ECB to cap the difference in borrowing costs between stronger and weaker Eurozone nations. The logic is that growing yield spreads drive investor fear, do not represent the true strength of these economies, and threaten a self-fulfilling bond run. Germany is naturally wary.

The plan would place the ECB directly in the realm of fiscal policy and political decision-making – a dangerous and almost untenable position for an unelected, independent central bank. Bond spreads are ultimately the market’s judgement of the fiscal policy and domestic politics of each Eurozone country. Any failure or uncertainty in either area would see the level of ECB bond-buying directly influenced by national governments’ decisions. This is even more concerning given that, if borrowing costs have an effective cap, the incentive for governments to reform quickly and effectively would be severely reduced.

The oft-cited upside is that the ECB’s unlimited commitment would be enough to deter investors from challenging the ceiling on borrowing costs, meaning that the ECB may not be required to intervene much at all. But this impact may be overstated.

Take the peg between the Swiss franc and the euro, equipped with its own “unlimited” backstop from the Swiss National Bank (SNB). The SNB has had to defend the peg, causing it to accumulate reserves equal to 65 per cent of Swiss GDP. Clearly markets didn’t take the bank at its word. It’s not clear that the ECB would be any more successful, especially in the face of similar safe haven flows into northern Eurozone countries, and investors’ desire to offload risky assets at a decent price. Don’t forget that the ECB has also seen its own credibility dented over the past two years.

It’s been contended that current borrowing costs are irrational and therefore warrant ECB intervention. While yields may not accurately represent the economic fundamentals of each nation, they are a result of markets trying to price in the domestic and European political risk, as well as the structural flaws in the Eurozone. Using the ECB to try to “correct” these issues would damage the price determination mechanism in markets.

This leads us to another area of potential political controversy. The ECB would be taking a huge step towards risk and debt pooling by allowing an EU institution to redistribute problems around the Eurozone – since all Eurozone members stand behind the ECB. Such a huge decision, integral to the future of the Eurozone and Europe, should not be taken by an unelected apolitical institution.

The fact that such a decision can’t be made at the intergovernmental level is a sign that the Eurozone is not ready for such a move. Using the ECB to force the pace of integration may well backfire. It seems many have forgotten the problems caused by pushing ahead with an unfinished economic and monetary union, lacking clear political will, in the first place.

On top of all of this, such a move stands on incredibly shaky legal ground (thanks to its clearly defined statute, which stops it from financing sovereign states). It also fails to offer a solution. This is why intervention has little support in Germany.

The spreads in borrowing costs are a symptom of the crisis rather than a cause, although they have admittedly made things more difficult. However, artificially forcing them together will only paper over deeper problems. The best such a move can do is to buy time.

With the ECB already having bought Eurozone leaders two years, which were promptly wasted, we must ask whether this latest proposition is worthwhile.

There is, as of yet, no definitive answer. But the first move must be at the intergovernmental level. Until progress is made there, any move by the ECB would simply jeopardise its fundamental mandate, putting more money at risk and dragging the crisis on further, all without any clear end in sight. The ball is firmly in Eurozone leaders’ court and should stay there.

Monday, August 20, 2012

We also have an op-ed in today's Times, in which we look at forthcoming proposals for a 'banking union' in the eurozone. We urge the UK government to explore creative solutions, including what we call a 'single market lock':

In the desperate search for the euro’s saviour, all eyes have turned to the concept of a “banking union”. Regardless of whether it is a good idea or a bad idea, banking union will undoubtedly cut not only to the heart of a key UK industry — financial services — but also the wider issue of Britain’s future in the EU in the face of further eurozone integration.

However, the typical response of City people, or those in Whitehall for that matter, is confused. On the one hand they love the idea, seeing it as a backstop for shaky eurozone banks that threaten City firms and the British economy alike. On the other, they fear it on the basis that the UK could be left without “a seat at the table” in Europe, meaning that the City would be forced to accept rules written for and by the eurozone. This hardly makes for consistent policy.

A banking union effectively involves three steps: a single rulebook, a single supervisor and a joint backstop (including a deposit guarantee scheme and resolution scheme with a wind-down mechanism). Given the Continent’s vastly differing banking systems and interests, achieving these three steps will be hugely challenging — and probably take years.

Still, the European Commission will kick-start the process this autumn by tabling a proposal to make the ECB the single financial supervisor for eurozone banks, for which there is broad support. While David Cameron has ruled out the UK taking part, with zero chance of it being accepted domestically, he has actively encouraged the creation of a banking union on the condition that “British interests are secured and the single market is protected”. The problem for the UK is that a banking union, if developed to its logical end point, will almost certainly cut across the single market in financial services.

For Britain and the City there are two main risks, the extent of which are unknown at present. First, companies doing business in the euro area could be required to be supervised by eurozone authorities. The ECB has already demanded that City-based clearing houses establish themselves inside the eurozone to be allowed to clear transactions in euros, something the UK has challenged at the European Court of Justice. If such practices become part of a banking union, the City would face a series of hurdles to doing business in the eurozone. The second risk is that the eurozone 17 start to write banking and financial rules for all 27 EU states, using their in-built majority in the Union’s voting system to implement them via the EU institutions.

Here, it is vital to understand the political incentives created by a banking union. To avoid banks free-riding on German taxpayers, Angela Merkel, the Chancellor, is likely to insist on any financial backstop being backed by perfectly harmonised regulations — for example, on capital requirements or bonuses — with little or no national discretion. This could well spill over to Britain, as the eurozone is unlikely to accept an uneven playing field within EU financial services, with the UK having few ways of blocking eurozone-tailored regulation being applied to the single market, even if detrimental or discriminatory.

So what should be done? First, Britain needs a consistent diplomatic position: it cannot both actively call for a banking union and implicitly threaten to veto it, as is the case at present. Second, to avoid the new structure — including the ECB — stepping into single-market territory, the UK needs to work with EU allies to make sure that it is fully accountable. The division of labour between the ECB and the London-based European Banking Authority needs to be made perfectly clear, for example.

However, given the stakes, Britain also needs to think creatively about new institutional arrangements with Europe, not only to guarantee the City’s position as a global entry point to the single market — offered by continuing EU membership — but also to create a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave. There are several potential solutions. For example, non-euro members could be given the right to appeal against any proposal at the European Council, where all countries have a veto, if it is deemed to undercut the single market or be discriminatory — a “single-market lock”, if you will.

Such a move may require treaty change, but so will the steps towards banking union beyond the single eurozone regulator. Furthermore, if pitched right, such proposals could draw support from countries on both sides of the eurozone divide, including Sweden, Germany and Poland, given that the motivation would be to protect the single market.

A eurozone banking union is still shrouded in unknowns. But the City, even if it wants things to stay the same, may have to accept that things will have to change.

'It will not be the case that the south will get the so-called wealthy states to pay. Because then Europe would fall apart.” Thus spoke Horst Köhler, former German president, finance secretary and IMF head, almost two decades ago.

Köhler’s remarks are worth pondering. A series of multi-billion-euro bail-outs – and more to come – have now planted a north-south political divide at the heart of the European project. Taxpayers in Europe’s north resent underwriting their southern neighbours, while voters in the south are equally frustrated at having austerity imposed upon them from abroad. As has been noted repeatedly, this is the greatest tragedy of this crisis: a project that was meant to bring people together, now risks driving them further apart. Alas, events in the eurozone this autumn could further exacerbate this tension. There are at least five key stand-offs to watch over the next few months:

Greece v Germany: Greece managed narrowly to escape running out of money today by raising almost 4 billion euros in short-term debt. But Athens will face an excruciating autumn. On almost every count, Greece is miles away from meeting its EU-mandated austerity targets, which raises the questionof whether Germany – or the IMF – will pull the plug on the country in October when its next progress report is due.

Though there is still scope for muddling through, almost any outcome will lead to rising political tensions. If Germany sticks to its guns, the popular disillusion in Greece will grow massively. If Berlin gives in, it faces a serious backlash from the country’s public – a majority of which wants to kick Greece out.

Spain v the North: Amid continued problems, Spain could possibly request EU cash as early as September. But the country is simply too big for a Greece-style bail-out, while Madrid would not accept having its economic policies fully decided in Brussels and Berlin. Instead a third way must be found involving less money and softer conditions, probably with heavy and controversial ECB involvement. The North will dislike such an arrangement – particularly cheap ECB money going to Spain – but may give in for fear of worse.

The bail-out funds v national democracy: On September 12, Germany’s constitutional court will rule on whether the eurozone’s permanent bail-out fund – the European Stability Mechanism (ESM) – is compatible with the country’s “basic law’, following a host of complaints. Though unlikely, should it strike it down, the markets will go absolutely crazy. Regardless, the ruling will leave a bad taste in Germany and shows how the ESM is becoming an increasingly toxic issue, with southern and northern politicians disagreeing fundamentally on its size and whether it should be given a direct credit line to the ECB.

The Dutch v Europe: September 12 will also see another example of national democracy reasserting itself: the Dutch elections. Geert Wilders, leader of the super-populist PVV, is seeking to turn the campaign into a referendum on Europe, hoping to tap into the Dutch anti-bail-out mood. At the same time, the Dutch socialists – currently leading in the polls – have vowed to resist both the EU fiscal treaty and further transfers of power to the EU without approval in referendums. A divided Dutch parliament and more assertive government will almost certainly make eurozone politics even more complicated.

Germany v France: This autumn will also see negotiations over whether the eurozone will take the next big leap towards an economic union, with an October EU summit tasked with providing a “road map” for more integration. Ideas include a banking union (with a single supervisor and joint backstop) and collective government borrowing in the form of eurobonds. The issues are tremendously complicated, subject to a cobweb of disagreements and will take years to clear away. But importantly, this could widen the gap between Germany and France, with the two disagreeing fundamentally on the order of events. Berlin wants a political union first, meaning greater German control over others’ finances in return for underwriting them – while Paris wants to press ahead with stronger bail-out mechanisms, via the ECB and others, leaving the oversight for later. The Franco-German axis is not about to break, but maintaining it will become increasingly difficult.

So how should Britain respond to all of this? Simple: try to control what it can control and leave the rest behind. The UK is right to seek to buffer up against a potential euro meltdown. It is also right to look for ways to ensure that further eurozone integration – such as a banking union – is not detrimental to Britain or the single market. But the UK government needs to stop giving unwelcome advice on the need to turn the eurozone into a “debt union” or for the ECB to start spraying the Continent with cheap money – both options effectively involving Angela Merkel completely running over her own voters.

The eurozone crisis has unleashed some seriously unpredictable political forces. EU leaders may have to choose between maintaining the euro and maintaining national democracy as we know it. In either case, we have no idea how voters – in the North and South alike – will respond.

Wednesday, August 15, 2012

Italian Lega Nord party's opposition to the euro is clearly not limited to two nostalgic MPs organising a rally where the Italian lira is used as the official currency. Call it political opportunity, but since Lega Nord is no longer in government, it has stepped up its anti-euro rhetoric by several notches.

Roberto Maroni (see picture) - the party's recently appointed Secretary General and a former Italian Interior Minister - made some very interesting remarks in an interview with La Repubblica (available here).

He said,

“At the end of August, we will submit to the Court of Cassation [Italy’s supreme court] a citizens’ initiative for a legislative proposal to hold a consultative [i.e. not legally binding] referendum on the same day as the 2013 elections, in which Italian citizens can have their say on the euro. I want to collect millions of signatures, and I can guarantee that our initiative is not an isolated one in Europe.”

“Listening to the people is no blasphemy. In any case, it would be a consultative referendum. My objective would be for such a referendum to be held in all [eurozone] member states before the 2014 European elections. This is why I am going to meet the euro-critics in other EU member states.”

So what would happen if the ‘no’ camp were to win (which, according to recent opinion polls, looks unlikely at the moment)? This is Maroni’s thought-provoking idea,

“New scenarios would open up. What I would like to see is a new eurozone with Northern Italy in the euro. But in order to get there, a referendum is needed first. The most important thing is that democracy should decide, not bureaucracy.”

However, Maroni’s position sounds rather confused. On the one hand, keeping only Northern Italy in a ‘new eurozone’ would entail splitting the country first (which, by the way, remains the primary aim of some Lega Nord members). On the other hand, Maroni also seems to suggest that Italy would not face mayhem outside the single currency. He argues,

“Great Britain taught us a great lesson with the Olympics. Someone must explain to me why that country is so strong outside the euro, whereas Italy outside the single currency would be a catastrophe…Anyway, our vision is not anti-European, but neo-European. And we are the only ones who have it.”

On a more general note about the future of European integration, Maroni said,

“The analysis [Lega Nord] made more than ten years ago turned out to be correct. Europe has failed. We are not going towards the United States of Europe envisaged by Carlo Cattaneo and Altiero Spinelli, but rather towards a single state which has all the characteristics of Hobbes’ Leviathan.”

“I agree with what the Bavarian Minister-President [Horst Seehofer, who also featured on our blog recently] has said. People don’t want a European super-state…One thing is certain: the political union supported by the élites has turned out to be a fantasy of poets [this expression should sound familiar to the readers of our daily press summary, see here], and a denial of democracy. This [happens] because the bureaucracies rule.”

Pretty strong words to say on the Ferragosto bank holiday, with many Italians (including Mario Monti) enjoying their summer break. It is too early to say how far Lega Nord can get with this initiative. According to the Italian constitution, 50,000 signatures are required to submit a citizens' initiative - a number Lega Nord should be able to collect easily. However, the draft bill then needs to get parliamentary approval to become law - which looks much more difficult to achieve.

Nonetheless, the initiative in itself is politically quite significant. Furthermore, it will be very interesting to see how many Italians will sign up to it - we can see the number going well beyond the legally required threshold of 50,000.

Tuesday, August 14, 2012

Lega Nord has decided to treat its supporters to a bit of 'throw back' party, remembering the days when Italy used the lira as its currency. The party has organised a rally in Avio (north-eastern Italy, where else?) for this weekend, at which the lira will be used as the only official currency. Interestingly, the two Lega Nord MPs who promoted the rally - Maurizio Fugatti and Sergio Divina - have decided to officially invite Italian Prime Minister Mario Monti.

The two said in a joint statement,

“This will be the opportunity to show to the technocrats and the enlightened bureaucrats who built this Europe, including Prime Minister Mario Monti, the damages caused by the euro, which they decided to introduce sitting around a table without the people’s approval – the consequences of which the citizens are now paying every day in terms of cost of living. The need for a popular referendum is now evident, so that those who work and pay taxes can express their opinion on Europe and the euro.”

It is the second time in only a couple of days that Italian politicians use the words 'euro' and 'referendum' in the same sentence. From the opposite side of the political spectrum, Italian comedian Beppe Grillo - whose Five Star Movement has been consistently polling at over 20% during the past few months - wrote on his blog recently,

“A referendum on the euro and the restructuring of [Italy’s public] debt is ever more necessary. See you in parliament...It will be a pleasure.”

Neither of these parties is likely to be in government after next year's elections, and recent opinion polls suggest that a referendum on the euro would see a quite clear victory for the 'stay inside' camp. However, as we noted several times before (see here, here and here), such a change in rhetoric and the fact that cross-party support for the single currency can no longer be taken for granted in Italy is in itself very significant.

Monday, August 13, 2012

Over the last few weeks, a range of German policymakers have fired broadsides against further German involvement in the eurozone crisis, and against further aid to Greece in particular. Referring to September’s troika report on Greece, Michael Fuchs – the deputy parliamentary leader of Angela Merkel’s CDU party – yesterday toldHandelsblatt that:

“Even if the glass is half full, that won’t be sufficient for a new aid package. Germany cannot and will not agree to that. We reached the point where the Greeks must show they are capable of delivering a shift long ago.”

Last week, Horst Seehofer, Prime Minister of Bavaria and leader of the CSU, the Bavarian sister party and coalition partner of Angela Merkel's CDU (which has been getting increasingly agitated by the eurozone bailouts), proposed a series of referenda:

"We must involve the people... First of all: on the transfer of important competences to Brussels. Secondly: on the accession of new states to the European Union. And thirdly: on German financial aid to other EU states."

In particular Seehofer cited debt pooling such as eurobonds or a debt redemption fund, adding that "with the CSU there won't be any United States of Europe".

Merkel's other coalition partner, the liberal FDP, is also stepping up its rhetoric, with its leader and deputy Chancellor, Philipp Rösler and also its leader in the Bundestag, Rainer Brüderle, saying they were reconciled with a Greek euro exit. Bavarian Economy Minister Martin Zeil has gone even further arguing that:

"...a country needs to leave the euro, when it doesn't fulfil its duties. If necessary, two or more [countries] could leave."

From the other side of the political spectrum, former German Finance Minister Peer Steinbrück (SDP) last month stated that:

"in certain cases, I have increasing doubts whether all countries will be able to be kept inside the eurozone (...) I can see how certain countries will be unable to close their competitiveness gaps [with Germany]"

However, the SPD have also recently publicly come out in favour of eurozone debt pooling - albeit it with strict conditionality in terms of national financial policy-making.

Otmar Issing, former chief economist of the ECB, added his voice to the chorus, saying some eurozone member states might have to leave:

"Everything speaks in favour of saving the euro area [however] how many countries will be able to be part of it in the long term remains to be seen."

The question is whether all of this is rethoric, or the beginning of something else.

Over on Liberal Democrat Voice's the 'Independent View', we argue that:

Following the bad blood within the coalition over the collapse of Lords reform and the constituency boundary review, there has been much speculation that the two parties will enact a policy ‘reset’ after conference season, with Oliver Letwin and Danny Alexander already reportedly working out the details. Most people looking for potential fresh common ground between Tories and Lib Dems would hardly place ‘Europe’ at the top of their list. However, while the parties are unlikely to ever see eye to eye on the EU, given political will, there are a number of areas of potential agreement.

For example, both parties already agree on the need to amend the Working Time Directive. However, in terms of immediate action and potential achievability, there is no better target than reforming the EU budget. While the UK and other member states struggle to balance their books, the EU budget has grown year on year despite the vast majority of spending going on policies at best irrelevant, and at worst outright damaging, in the fight to deliver the jobs and growth Europe so desperately needs.

Around 40% of the budget still goes on the Common Agricultural Policy; mostly subsidies to farmers and landowners which act as an outright disincentive for modernisation given they are de-linked from any meaningful economic activity. It is difficult to think of a policy more offensive to liberal values than the CAP: market distorting, sustained by effective lobbying from vested interests, staggeringly wasteful and inefficient, and disproportionately harmful to the least well off in society via higher food prices. Moreover, despite the Commission’s rhetoric, the CAP’s ‘green’ credentials are poor. Slimming down and radically refocusing the CAP by explicitly tying it to environmental objectives such as biodiversity would not only be hugely efficient, it would add credibility to the coalition’s claim of being the ‘greenest government ever’.

Another area in need of overhaul is EU regional spending; the current structure involving all regions in all member states, irrespective of their relative wealth, is economically irrational. For this reason, spending should be limited to the least wealthy member states where it can have the biggest positive impact, an objective endorsed by Nick Clegg. This would save the UK around £4bn net over seven years which could be ploughed straight back into developing the UK’s least wealthy regions, helping the Lib Dems to achieve their long-standing ambition of ‘rebalancing’ the economy away from its over-reliance on London and the South-East.

These measures would require the coalition adopting a much tougher line in the on-going negotiations over the EU’s next long-term budget than it has done, or else risk the existing flawed spending patterns becoming locked in until 2020. While achieving these reforms will not be easy, if pitched correctly, they could command support all across Europe.

These measures would deliver a number of wins; saving UK taxpayers’ cash, soothing coalition tensions, and securing electoral popularity – Lib Dem members and voters are in tune with national opinion in wanting more national control over many policy areas currently significantly influenced by Brussels. Having shown that they can be ‘tough’ on the EU, Lib Dems would then have greater credibility when making the positive case for its continued involvement in other areas.

Thursday, August 09, 2012

For German speakers, this op-ed from Berthold Kohler - one of FAZ’s editors-in-chief - is definitely worth a read. We've translated the key bits below.

Without lapsing into populism, Kohler nails the problem with the narrative pushed around by certain politicians that: "the only choice available to Europeans is to seek refuge in a political union". However, as Kohler argues, this is a false dichotomy:

“Among the alleged certainties was one that the organisation of Europe only ever grew in its times of crisis. However, many of the contradictions, differences, and conflicts of interest that led to the previous escalations of crises were merely pushed aside, glossed over or covered up with a lot of (German) money. These skeletons in the closet of the European house played an essential role in ensuring that the over-indebtedness of states evolved into the mother of all EU-crises.”

“By and large, it is no longer seriously disputed that it was a mistake to establish a monetary union without having first laid the foundations for a common budget, fiscal and social policy. The participating states were not ready to accept the relinquishment of sovereignty that this would have entailed; many EU member states are still not ready… Warnings of experts were at best ignored; the euro was portrayed as a miracle healer in of itself… This belief-bubble has, like similar such speculations, burst. Yet the debris of earlier European political axioms have already clumped together to form a new dogma. There is only one choice: giving up the euro and returning to national currencies – regularly associated with the ‘failure’ of Europe and a return to the Middle Ages – or a great leap into a political union which alone can save the euro.”

“The Europeans are thereby told that in truth they have no choice, there is only one way out of the crisis – the one that the majority of them previously did not want to take. For this reason, the descriptions of the political union are made largely vague. The small print is not very popular. Any form of standardization is associated with a loss of diversity and autonomy.”

Kohler concludes that:

“Not only the economic and national conditions in the participating countries, but also their political presumptions and ideals utopias are still too disparate as to be able to be accommodated within a political union. To believe that this variability could be reduced to a common denominator with a single strike of constitutional and political genius, which the peoples of Europe will enthusiastically agree to in the face of all previous experiences, is to underestimate the strength of their cultures, collective memories, myths and mentalities – the very diversity that belongs to the essence of Europe.”

“The crisis in Europe is not only about money but also the limits of ‘ever closer union’. Jean Monnet’s model of integration by means of the supranational [European] Commission is outdated... This is a good thing…it is time for proper democracy in Europe.”

Wednesday, August 08, 2012

As competent as he is, Italian Prime Minister Mario Monti has really stepped in it this week. Only one day after Der Spiegelpublished his pretty unfortunate statement that eurozone governments should not be "completely bound by the decisions of their parliaments", the WSJ yesterday published excerpts from an interview with Monti from last month. In the interview, Monti suggested that, if Silvio Berlusconi and his government were still in power,

Italy's spreads would now be at 1,200 or something.

Ouch!

He might be right, but still not smart politics. Remember, although Monti leads a technocrat-only government (and, indeed, is an unelected technocrat himself), he has to rely on parliamentary support to pass the structural reforms Italy needs so badly.

Berlusconi's party still holds the highest number of seats in both chambers of the Italian parliament. Therefore, if Berlusconi's MPs and senators were to withdraw their support, Monti and his cabinet would have no alternative but to quit. So Monti should probably choose his words more carefully.

Berlusconi's party instantly retaliated, and the result was the government failing to obtain a majority during one of the votes in the lower house yesterday over a new €26bn savings package. It was mainly a symbolic move (the specific vote was on a procedural act) and the package was eventually approved, but it was a reminder of the important role still played by Berlusconi's lot.

Monti should display a more balanced and respectful behaviour, as the [Italian] parliament is holding one vote of confidence after the other. Sooner or later, someone may grow tired.

So for the second time in less than 24 hours, Monti was forced to apologise (although his office prefers using the word 'clarify'). He called Berlusconi and told him he was "sorry" because that specific sentence had been "extrapolated" from a longer conversation and taken out of context.

Apologies accepted, it seems. But the episode is another reminder of how for Italy the main risk remains political.

Tuesday, August 07, 2012

Italian Prime Minister Mario Monti has launched a diplomatic offensive in Germany, involving several interviews with the main German dailies. However, he made a faux pas while talking to German magazine Der Spiegel. Monti said,

"If governments allow themselves to be completely bound by the decisions of their parliaments without maintaining some room for manoeuvre in international negotiations, then a break-up of Europe will be more likely than closer integration."

Excuse us? An unelected technocrat instructing national governments to ignore their parliaments? Whatever Monti tried to achieve with these remarks, it didn't work. And he has already experienced a backlash in Germany, where if anything, there's close to a cross-party concensus over the need for giving the Bundestag more oversight not less, in the wake of the eurozone crisis and the multi-billion euro bailouts. The various rulings handed down by the German Constitutional Court during the eurozone crisis, demanding a stronger role for the Bundestag, also shows how Monti is messing with some pretty fundamental democratic settlements (see here, here, here and here).

Unsurprisingly, Monti has attracted criticism from across the German political spectrum. German Foreign Minister Guido Westerwelle (from Merkel's junior FDP coalition partner) said,

"Parliamentary control over European policy is out of any discussion. We need to reinforce, not weaken, democratic legitimacy in Europe."

Alexander Dobrindt, the Secretary General of the CSU (the Bavarian sister party of Merkel's CDU) was far less diplomatic,

"The greed for German taxpayer money is blossoming in undemocratic ways with Mr Monti...We Germans will not be prepared to eliminate democracy in order to finance Italian debts."

The deputy leader of the opposition SPD faction in the Bundestag, Joachim Poss, suggested that the "unspeakable Berlusconi years" had undermined the image of parliament in Italy, and added,

"The acceptance of the euro and its rescue is strengthened through national parliaments and not weakened."

The en plein of rebukes was completed by the European Commission, with spokesman Olivier Bailly saying (have they started to learn?),

"The European Commission respects the competences of national parliaments."

"I just wanted to stress the need to maintain a continuous and systematic dialogue between [national] governments and parliaments, in order to make steps forward in the process of European integration."

But Monti's remarks give testament to a most concerning elitist mentality, which has all too often been evident in the history of European integration: democratic scrutiny is a nuisance that should be avoided wherever possible. If he thinks that the Europe that emerges from the eurozone crisis can be built on backroom deals struck between a handful of EU leaders, under the radar of national parliamentary scrutiny, he may be in for some very unpleasant surprises. Continuing down that road will result in the rise and rise of some seriously populist, anti-EU parties as voters look for alternatives. The baby will have been thrown out with the bathwater.

National democracy is not only a matter of principle but also serves a practical purpose: actions and policies that enjoy democratic legitimacy have a far greater chance of standing the test of time. Therefore, national parliaments are not the problem in the eurozone crisis, they are a big part of the solution to it.

Ironically, as he struggles to push reform measures thorugh his own parliament, Monti may soon realise just how wide of the mark his comments were.

Monday, August 06, 2012

Sigmar Gabriel, the Chairman of the main German opposition party, the SPD, today toldBerliner Zeitung that his party was prepared to
change its eurozone policy by accepting collective debt liability in
exchange for stricter budgetary oversight, claiming that the Merkel
government’s current strategy had failed. Gabriel acknowledged that for
such a move to be possible, the German constitution would need to be
altered and put to the public in a referendum.

So far SPD has broadly supported Merkel’s dual strategy of bailouts and savings/reform packages, albeit with additional emphasis on some mild stiumulus measures. And despite scathing rhetoric about the government’s political management of the crisis, when it came to it, SPD MPs have consistently voted with the government in the Bundestag.

The interview follows lengthy essay in Saturday’s FAZ by the philosophers Jürgen Habermas and Julian Nida-Rümelin, and economist Peter Bofinger, in which they argued that an EU political union with a core currency area was necessary to “win back at European level the sovereignty stolen by financial markets”. They argued that this would entail mutual fiscal, economic and welfare policies, the alternative to which would be a market-conformist facade democracy”. The essay has been widely linked to Gabriel’s comments in the German media today, not least because Gabriel has invited Habermas to help draft the SPD’s manifesto ahead of next years’ federal elections.

Should we get excited? Not yet. While the comments are significant, Gabriel did not explicitly say what form this debt pooling would take. In fact, Berliner Zeitung merely paraphrases Gabriel so it's not entirely clear exactly what he said. Along with the Greens, the party had previously indicated that it could accept a debt redemption fund – a time limited pooling of a certain portion of eurozone states’ debts – while appearing to rule out ‘full’ debt pooling / eurobonds. In addition, also Gabriel seems to support the classical German quid pro quo for debt-pooling - strict German-style budget oversight across the eurozone. As we've argued repeatedly, such oversight is very difficult to achieve. In addition, SPD lacks a single leader - Gabriel is only one part of a 'leadership troika' - so it is far from clear whether this is/will become official party policy. Former Finance Minister Peer Steinbrück's rhetoric on the crisis has for example been tougher than Gabriel's.

One thing is for sure - expect a continued vibrant debate both within the SPD and the country as a whole...

Friday, August 03, 2012

The day after the monthly meeting of the ECB's Governing Council and Mario Draghi's subsequent press conference - during which he said that the ECB is willing to intervene on the debt markets again but will hold fire for the moment - we've summed up a few media reactions from Spain and Geremany, opposite sides of the debate on what the ECB's role in the crisis should be. The discrepancy between what the Spanish and German press have made of Draghi's words is fascinating.

An article in El País with the headline, “Draghi pushes Spain towards another bailout” argues that:

"With a single shot, Draghi has shifted all the pressure onto [eurozone] countries verging on intervention. That is, onto Spain. Therefore, Mariano Rajoy’s government finds itself in the thorny condition of someone who has to choose between requesting a bailout – the second, after the one for [Spanish] banks less than two months ago – or burn in the markets."

A similar headline in Spain’s main business daily Expansión reads, "Europe pushes Spain towards a soft bailout”.
Interestingly, the paper notes,

"Make no mistake. Neither is Draghi the first high-ranking European official to show Spain the way to the [eurozone] bailout funds, nor did the [Spanish] government realise yesterday that this is what it is being asked to do."

In fact, the article goes on, other top European politicians, from EU Competition Commissioner Joaquín Almunia and Eurogroup Chairman Jean-Claude Juncker, made similar remarks over the past few weeks.

An opinion piece in another Spanish business daily, El Economista, carries the headline, “ECB to Spain: Seek a bailout”. The article says,

“The ECB is now an inoperative institution, the guardian of an ancient orthodoxy. At the moment, the ECB doesn’t want to be the solution…but is part of the problem…Spain will predictably see itself obliged to ask for a bailout. Sooner or later, the fearsome Troika (ECB, IMF and European Commission) will take the helm of our economy and our [public] accounts.”

Bernardo de Miguel, Brussels correspondent for Spanish business daily Cinco Días, writes on his blog that Draghi has made Italy and Spain a Godfather-style “offer they can’t refuse”, adding,

"Madrid and Rome have few options at their disposal, apart from Draghi’s offer, if they want to avoid a full bailout."

Meanwhile, over in Germany, the media have focused more heavily on the implications for German taxpayers and the fraught relations between Draghi and Bundesbank President Jens Weidmann.

Mass circulation Bild, referring to the lack of concrete details announced yesterday, carries the headline, “Could…Would…Should…What does Draghi’s euro wishy-washy mean for our money?”
Still, the good news for Draghi is that as long as the ECB’s ‘monetary floodgates’ remain closed, Bild have said he can keep his Pickelhaube.

Writing in Die Welt, Sebastian Jost is less complimentary towards Draghi, accusing him of “taunting” the Bundesbank. Jost argues that:

"ECB Chief Mario Draghi obviously feels comfortable in his role of the euro-saviour. However, not yet able to offer money, he had to make do with strong words and hidden side-swipes."

An article on Handelsblatt’s frontpage asks, “How long can [Bundesbank President Jens] Weidmann hold out in isolation?”, arguing that:

“At the ECB headquarters in Frankfurt, the warnings from Germany are hardly being heard, and they clearly have no influence on decision-making.”

"It would have been good not to interfere with the psychological impact of Draghi's announcement. But once again opposition came from Germany, from the head of the Bundesbank, Jens Weidmann, apparently the only one who voted against Draghi's plan in the Governing Council… It is indeed unwise to break the ranks of the Governing Council in this situation. Weidmann is fanning mistrust where he should be fostering confidence."

Two countries, two completely different roles in the eurozone crisis, two completely different interpretations of the same words. Meanwhile, European stock markets seem to have recovered from yesterday's losses. The interest rate on Spain's ten-year bonds has also decreased, after peaking at over 7.4% this morning.

The situation looks increasingly like another eurozone 'game of chicken'. On the one hand, Draghi yesterday effectively urged eurozone governments (primarily Spain, but also Italy) to show their hands first - that is, if they think they need help to bring their borrowing costs down they should request EFSF assistance. But at his press conference less than two hours ago, Spanish Prime Minister Mariano Rajoy insisted that he first wants to see what the ECB's announced "non-standard monetary policy measures" actually involve, adding that, as regards the possibility of Madrid asking the eurozone bailout funds to buy Spanish bonds,

"I haven't made any decision. I will do what suits the general interest of Spaniards."